• 13% dividend yield. Paid quarterly.
• Annuity type revenue with a cable infrastructure into 760,000 customer homes. APTV is the only cable service provider available in areas it operates.
• Initiate coverage with “BUY” rating and $0.64 target price, implying a 43% upside plus dividends.

Company Background

Asian Pay Television Trust (APTV) is a business trust that operates cable pay-tv and broadband services in Taiwan. It owns all the fibre and cable connections to customers’ homes. This “last-mile” access to homes is cost-prohibitive and extremely difficult to replicate. The company has a stable customer base of 760,000.

Investment Merits

1. Stock price has corrected to attractive levels. Share price is down more than 50% from its peak. There were three triggers to this: (i) accelerated S$100m capital expenditure required by the Taiwan authorities for APTV to introduce more digital set-top boxes. This raised gearing and interest expense; (ii) cut in monthly cable-TV fees in 2016. This hurt EBITDA by about S$10m. We do not expect this to reoccur for at least the next 2-3 years. Both factors culminated in a cut in dividends; and (iii) fears of new competition after the authorities opened up the sector in 2012. There has been much anticipation of new cable entrants, but none has appeared.
2. 3% yield, paid quarterly. APTV has guided for a 6.5-cent DPU for FY17. In our view, there is stability in these dividends. The S$103m dividend payable per annum is supported by operating cash flows of S$130m less maintenance capex of S$25m.
3. Revenue is recurrent with high barriers. Cable TV is an entrenched form of viewing TV in Taiwan. Cable has an 80% share of the TV market. Internet TV has not gained any footing due to a lack of local content. Revenue is recurrent for APTV. It collects an annuity like S$220m revenue p.a. from its 760,000 customers who are paying an S$24 subscription fee every month.

We initiate APTV with a BUY. We value APTV at a DCF valuation of S$0.64. This implies is a 43% upside, including dividends. Our target price pegs APTV at EV/EBITDA of 10.7x, still a 8.5% discount to regional peers.

What APTV does?

APTV* sells cable TV and broadband service** in 5 locations in Taiwan (refer to Figure 1). Revenue comes from monthly subscription fee of NT$529 (S$24) for 105 TV channels and NT$478 (S$22) from broadband. Cable TV accounts for 85% of APTV total revenue, with broadband 15%. The largest operating cost are content and depreciation, both are 25% and 23% of total operating cost respectively. APTV was listed on SGX in May 2013.

APTV is Taiwan’s 3rd largest cable operator with 14% market share. However, in the 5 locations (or called franchise areas) APTV operates, it is the sole provider of cable TV and broadband. An alternative to cable TV is internet TV (commonly called IPTV), owned by Chunghwa Telecom. On broadband, Chunghwa Telecom is the dominant 80% market share incumbent with its ADSL broadband service.

* APTV is a business trust that enjoy owns economic interest of Taiwan Broadband Communications (TBC), which is the actual operating entity that provides cable pay TV, and broadband services.

** For our Singapore based readers, APTV is similar to a Starhub cable TV and broadband service. StarHub has almost 500,000 cable TV customers that pays an ARPU of S$51 per month

What we find most attractive of APTV?

• Barriers to entry: We figure there are 2 major barriers of entry:

(i) Cable access to the home. APTV has spent more than 10 years to build up cable access into 1.2m homes. It is too costly and time consuming for any other party to replicate this infrastructure. That “little plug” in the home for cable belongs to APTV and it is very valuable.

(ii) Content arrangements with suite of local providers. Local content providers want viewership to attract advertisers. APTV large customer base makes them an attractive client for all content providers.

• Affordable product: Watching TV through cable is the most popular format in Taiwan. The price of the package is affordable at S$24 per month for 105 channels.

• Recurrent annuity like revenue. Around 85% of the revenue is subscription based. This provides a strong recurrent revenue stream. APTV customer base has been growing since inception, albeit at a slower pace (refer Figure 5).

• Good cash-flow streams: There is minimal working capital required because to enjoy the service, it has to be prepaid.

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